This Rally Is in Make-or-Break Mode: 5 Must-See Charts - views

For most of 2013, the big index has been charging ahead in a well-defined rally; volatility has been extremely low and price action has been bouncing within a tight channel since all the way back in November. Yes, the nearly-15% climb in the S&P over that period has been a very big move, but it hasn’t been an overblown exuberant pop higher. It’s been orderly.

That changed this week, when the S&P got batted down 2.3% on Monday and another 1.4% in yesterday’s session with a 1.4% rebound in between. Clearly, volatility is coming back into the market. But volatility isn’t a bad thing on its face.

The most critical thing to watch this week is going to be just how well the S&P is able to hold up at trendline support, the lower boundary of the rally. With the index sitting right on top of support as I write, the S&P is in make-or-break mode. But we’ve seen this before -- five other times since November, in fact. That means that traders and investors alike need to be cautious about picking up a “sky is falling” mentality.

Technicals are a study of the market itself. Since the market is ultimately the only mechanism that determines a stock's price, technical analysis is a valuable tool even in the roughest of trading conditions. Technical charts are used every day by proprietary trading floors, Wall Street's biggest financial firms, and individual investors to get an edge on the market. And research shows that skilled technical traders can bank gains as much as 90% of the time.

You don’t have to pull up a chart of the S&P 500 to see what’s happening in the broad market right now -- Comcast (CMCSA) has been a good enough proxy since November. The $107 billion cable operator has been bouncing within a well-defined uptrending channel for the past six months, shoving higher each of the last five times it hit trend line support. Now Comcast is testing that same trend line support level in today’s session.

Comcast’s channel gives traders a high-probability range for its price action to stay within. When you’re looking to buy a stock within a trend channel, buying after a bounce off of support makes sense for two big reasons: It’s the spot where shares have the furthest to move up before they hit resistance, and it’s the spot where the risk is the least (because shares have the least room to move lower before you know you’re wrong).

Shares are bouncing early in this morning’s session -- and now makes for a good time to be a buyer. If you decide to jump in here, I’d recommend putting a protective stop right below the 50-day moving average. If CMCSA falls through the 50-day, we know we’re wrong on this trade with minimal losses.

MasterCard

We’re seeing the exact same setup in shares of MasterCard (MA) right now.

Just like Comcast and the S&P, MasterCard has been moving higher inside of a trend channel for months -- since August, in fact. And while this stock’s channel is slightly more complicated than the one in CMCSA (there’s a secondary support line, S1, inside the channel), the trading implications are exactly the same. MA is sitting right on its support line as I write, so this morning’s bounce can be seen as a buy signal.

Since this is a longer-term uptrend, the 50-day hasn’t been quite as useful as a proxy for support lately. Instead, I’d recommend using the 75-day moving average if you’re looking to box in your risk quantitatively. Otherwise, just keep a protective stop right on the other side of the support line at S2 in the chart above.

First Solar

It wasn’t that long ago that investors hated anything to do with solar. But a look at First Solar’s (FSLR) chart suggests that’s not the case anymore. FSLR rallied hard earlier this month after bullish forecasts at the firm’s analyst meeting sent traders in a frenzy to buy the mid-cap solar name. Now investors are biding their time before the next move. Here’s how to trade it.

After breaking significantly higher, FSLR is currently consolidating in a rectangle pattern that’s formed by a horizontal resistance level to the upside and horizontal support on the downside. Resistance comes in at $39.50 right now, and support is at $36. Consolidations aren’t uncommon after a big move because they give traders a chance to take a breath and figure out their next move after a big share price change. As a result, it makes sense to make a bet in the direction of the breakout from the channel.

With any technical pattern, it’s critical to think in terms of buyers and sellers -- not shapes. After all, triangles, head and shoulders patterns, and the like are a good way of describing what’s happening on a chart, but they’re not the reason why it’s tradable. Instead, that all comes down to the supply and demand caused by those buyers and sellers.

The horizontal resistance level at $39.50 is a place where a glut of sellers has been willing to step in and put a ceiling in the stock. A breakout means that increasingly eager buyers have absorbed all of the excess supply for shares sitting at that level -- and without that barrier in place, shares have room to rally to the upside (the opposite is true on a drop through $36).

That’s why a move through $39.50 is a buy signal in FSLR.

Pfizer

Pfizer (PFE) is another name that’s consolidating right now, just in the much shorter-term. The big pharma firm is currently forming a short-term pattern called a pennant, a sideways blip that’s bounded by converging trendlines. Just like with a rectangle, the trade to make is a bet in the direction of the breakout.

The pennant in PFE is a little more directionally-biased than the rectangle in First Solar. Pennants are often called “half mast patterns” because a breakout to the upside generally results in another move that’s equal to the first -- that would spell considerable upside if Pfizer pushes through the resistance level at the top of the chart. Since that move would break Pfizer out of the top side of its trend channel, it would likely happen fast. Keep a close eye on it.

Momentum adds some extra confirmation to the pennant setup right now. In spite of PFE taking a breather, 14-day RSI remains in a solid uptrend right now. Since momentum is a leading indicator of price, the fact that RSI is holding its uptrend bodes well for investors here. If you decide to buy the move higher, I’d recommend putting a tight protective stop in place.

General Electric

Not all of the charts we’re looking at today are bullish. General Electric (GE) is an example of a name that’s looking “toppy” right now.

GE has been enjoying the same rally that we’ve seen in most of the other charts today, but the big difference is how this stock’s price action has behaved more recently. GE is currently forming a head and shoulders top, a popular pattern that indicates exhaustion among buyers. The pattern is formed by two swing highs that top out around the same level (the shoulders), separated by a bigger peak called the head; the sell signal comes on the breakdown below the pattern’s “neckline” level, right at $22.75.

The broken RSI uptrend at the top of the head adds some extra evidence to the trade, but ultimately the only sell signal is the price break through the neckline. Lest you think that the head and shoulders is too well-known to be worth trading, the research suggests otherwise. A recent academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in “profits [that] would have been both statistically and economically significant.” That’s good reason to keep a very close eye on GE this week…

At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.